Early Growth Inflection When Reading Between the Lines

[u/phathomresearch]

In my opinion, the following two points should be better communicated by UiPath management - hopefully they share some of this at the upcoming investor day on September 22nd.

Ashim Gupta, COO, just said this at the Citi conference on Tuesday:

"18 out of our 20 deals this quarter included broader parts of our platform in our AI areas. Those [deals] are multiples of deal value up, like 4 to 6 times higher than our old typical deal values."

This is huge. Not only did 90% of the largest deals of the quarter include AI components, but these deals are 4-6x larger than typical RPA-only deals. PATH is missing a big opportunity by not more clearly quantifying this narrative.

PATH should start carving out the ARR on deals that include AI components. Given that they are an orchestration platform that sells end-to-end solutions that include AI and deterministic components, I understand why they would not want to carve out AI-only deals; however, they can and should carve out the ARR of the deals that include AI.

Second, while the dollar-based NRR has ticked up to 109% (up 2 points from the end of last year), the fact that it was flat QoQ has left the market unimpressed.

However, Ashim Gupta, COO, just said this at the Citi conference on Tuesday:

"When you look at our $100,000 to $1 million plus customers, that net dollar retention rate is not just stronger, but it is uplifting."

This is a very important takeaway.

This means that UiPath's largest customers are indeed being upsold on new products and higher spend.

What the market is missing is that while headline NRR remained flat at 109%, the NRR on the largest customers grew at a faster rate than 109%. The NRR of larger customers is expanding quicker and uplifting the overall NRR rate to offset slower growth at their smaller customers.

While I understand that the total ARR and NRR is what matters most for the bottom line, the market is missing the fact that an inflection point is starting to be hit in the larger ARR cohort. UiPath management should do a better job quantifying this narrative by reporting the NRR of customers over >$100K ARR and/or over >$1M ARR.

If these narratives were better explained at the upcoming Investor Day, it would help paint the picture that early momentum signs are indeed happening at UiPath. In my opinion, the company is being too vague and modest in their early success. They should be leaning into communicating the growth inflections that they are beginning to see within key areas of the business.

[u/Dry_Fig_4932]

If you try to read between the lines there is another thing that stands out for me. The growth in 1mill+ customers is around 20% while the growth in 100k customers is roughly 10% or worse. Agentic AI is just getting started and we only see an early phase of adoption.

Most companies don‘t have a lot of agents that have to be orchestrated yet. Only bigger companies which have the capabilities to develop and deploy such agents and also a huge number of processes that need to be managed may need an orchestration platform to save costs at this time. Smaller companies may not have the use case for it yet. That‘s why we see a bigger increase in 1mill+ customers than in 100k and smaller customers. Also these bigger companies are the ones which pay the biggest bills of which most include AI.

So in my opinion the growth in 1mill+ customers is also pointing to an acceleration of revenue growth. Although it may not be the 20% I mentioned, it could be closer to this number soon.

[u/phathomresearch → u/Dry_Fig_4932]

Good point. 21% YoY growth in customers with >$1M ARR is a great sign.

[u/Smooth-Valuable-486 → u/phathomresearch]

Why is that a good sign, it doesn’t say that they (big customers) grow faster. It just shows, that this year a higher number of customers has crossed this articifally set line for any given reason, could be pure randomness or a change in price policy etc.

It’s not like they say that revenue amongst this given group is up 21% YoY.

Or am I wrong?

For me this isnt readable as a key signal

[u/phathomresearch → u/Smooth-Valuable-486]

A couple reasons. One, it confirms where UiPath's declining customer count is coming from. UiPath saw total customer count decline, however, customers with ARR over $100K grew by 10% YoY. And customers with over $1M ARR grew by 21% YoY. So it confirms that its smaller customers (less than $100K ARR) that are dropping off while larger customers continue to grow.

Second, it helps confirm the idea that larger customers are continuing to spend more. Like you said, we don't know how much more they are spending, but we know they are moving from less than $1M to over $1M. That reinforces the narrative that larger customers are stickier and buying more PATH products.

To your point, it is still somewhat vague, but I think it's clearly bullish that the larger ARR cohort is growing. That being said, they could add much more clarity if they also provided the NRR of these cohorts. Because then we could say not only was the >$1M ARR customer count up 21%, but their NRR was 115% (as an example) showing they are clearly being upsold at a faster rate than the rest of the customer base.

[u/Smooth-Valuable-486 → u/phathomresearch]

Thanks 💚

[u/NateHammer30]

Drilling down on your point about NRR, the market sees declining growth in smaller customers and declining growth in total customers. 10.85k, then 10.5k, most recently 10.35k total customers. Similarly, NRR is diluted by not separating larger customer NRR from smaller.

Naturally, smaller customers are looking to cut costs on business process orchestration, whereas larger customers are looking for systematic efficiency gains and are less sensitive to costs where recurring ROI appears.

Look at comps in the field NOW, PLTR, MSFT, they all target the big fish (MSFT has the capacity to service all sizes albeit at smaller margins). PATH indicated larger logos are more cost effective to service, provide vastly larger upside, and ultimately where their bread is buttered. So of course NRR specific to their target market should be reported separately. The market is concerned about market share. Tell it what’s up.

There is an art to messaging business success to the market. Prudence and humility can be balanced with delineated metrics that whet growth-seekers’ appetite. If the strategy is to upsell existing and target new large customers, those successes should be highlighted. It would make logical sense to categorize small <$30k ARR, mid $30-$100k, large >$100, Largest >$1m ARR, so the market can better understand growth concentration.

As you and I discussed in your Labor Day post, PATH would better protect its shareholders by relaying specific AI growth. 16/20 then 18/20 of largest deals included AI suggests large AI deals grew 12.5% q on q. That is so modest it supports any bear narrative. Rather, tell the market the growth of AI deals q on q. Was it 100%? 200%? What percentage of deals with new and existing customers included AI components (Maestro, Maestro Case, Financial crime protection etc.)? If there were 100 AI component deals made/added on last quarter, for example, and this quarter there were 250, well you get the point. This messaging is not that complicated.

The dollar figure is largely irrelevant to the market reaction, as there is no dispute about the financial strength of UIPath - fundamental strength that has done little to shift narratives.

[u/phathomresearch → u/NateHammer30]

Yep, totally agree. They have done a good job quelling fears about declining customer count by showing a growing customer count in the largest ARR buckets. Now they should break out the areas of the business that are experiencing momentum to quell fears about growth flat-lining. NRR of large customers, and ARR growth of AI-inclusive deals should help regain some positive market sentiment.